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Investors are always looking for growth in small-cap stocks like Cloud Peak Energy Inc. (NYSE:CLD), with a market cap of US$41m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, in particular ones that run negative earnings, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into CLD here.
How does CLD’s operating cash flow stack up against its debt?
CLD’s debt level has been constant at around US$407m over the previous year which accounts for long term debt. At this constant level of debt, CLD’s cash and short-term investments stands at US$109m for investing into the business. Additionally, CLD has generated US$19m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 4.7%, signalling that CLD’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making businesses since metrics such as return on asset (ROA) requires positive earnings. In CLD’s case, it is able to generate 0.047x cash from its debt capital.
Can CLD meet its short-term obligations with the cash in hand?
At the current liabilities level of US$138m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.02x. For Oil and Gas companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can CLD service its debt comfortably?
With a debt-to-equity ratio of 41%, CLD can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since CLD is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although CLD’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure CLD has company-specific issues impacting its capital structure decisions. I suggest you continue to research Cloud Peak Energy to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CLD’s future growth? Take a look at our free research report of analyst consensus for CLD’s outlook.
- Valuation: What is CLD worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CLD is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.